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The independence of BI and financial sector authorities
Government involvement in central bank governance institution is not a new phenomenon in other jurisdictions, but it does not exist in Indonesia.
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Center stage: The office building of Bank Indonesia (BI) stands out in Jakarta’s forest of concrete on Feb. 26, 2020. The House of Representatives passed last month the financial sector omnibus bill into law, which expands the central bank’s authorities.
(JP/Dhoni Setiawan)
D
eveloping a robust financial system is critical to the success of any economy, in particular Indonesia. As such, it is important that the country's central bank and financial sector authorities maintain their independence while still being accountable for their governance.
In fact, balancing the independence and accountability of Bank Indonesia (BI) as the central bank with that of financial sector authorities in the country has been a complex issue, and the debate often focuses solely on preserving independence.
However, a system that values independence but fails to enforce accountability is a system that is ultimately doomed to failure, negating the very purpose of independence in the first place. Therefore, while there is a need to ensure these institutions operate independently, on the other hand, it is important to maintain accountability.
Contrary to the popular belief and public misperception, the Law on Financial Sector Development and Strengthening (P2SK) actually addresses concerns over weaker independence of the central bank and financial sector authorities by not only reinforcing their independence but also strengthening the governance of institutions to enhance accountability.
Initially, it is imperative to acknowledge that the independence of a central bank is a vital component of its function and operation within the economy. The central bank is accountable for preserving price stability and is often assigned various mandates or objectives linked to monetary policy goals and other economic advancement strategies such as sustainable economic growth.
Thus, it is essential to recognize that the institutional structure of a central bank varies from country to country and is shaped by a multitude of factors, such as geographical size, political and economic system and so forth.
In practice, the government can exert influence over the central bank by appointing senior officials, with decisions about their terms of office reflecting varying levels of government control. For example, in Japan, the Finance Ministry selects several executives from the Bank of Japan (BoJ), while in China, the National People's Congress of the People's Republic of China (NPC) and the State Council exercise oversight over the allocation of central bank resources. This type of government involvement in central bank governance institutions is not a new phenomenon in other jurisdictions, but it does not exist in Indonesia.
